Recs

2

The Biggest Danger in IRA Investing

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

Having been a broker at what was largely a self-service, online firm, I had an opportunity to observe how investors acted when they were empowered with low-cost trade commissions. What I saw was pretty scary.

It won't surprise you to learn that cheap commissions make it much easier to justify trading more frequently. And what's more, that higher trading volume was especially evident in tax-deferred accounts like IRAs -- much more so than in regular accounts.

Dancing with the devil
You already know the reason why ... taxes. There's no tax liability with a transaction in an IRA. Too many investors, keenly aware of that fact, developed a tendency to trade actively using their IRAs. The activity of course cost nothing in taxes, but ended up costing a small fortune in commissions.

Obviously, the bigger the account and larger the trades, the less of a toll commissions take on your profits. For instance, if you've got $5,000 that you want to invest in a single stock, a $10 commission is only 0.2% of your investment. That's not so bad.

But for little investors who don't have as much to invest, even small commissions add up quickly. See how expensive a five-stock portfolio can get with a $10 commission:

Stock

Cost of 10 Shares

Commission as % of Share Cost

General Electric (NYSE: GE  )

$276

3.6%

Google (Nasdaq: GOOG  )

$4,337

0.2%

Wal-Mart (NYSE: WMT  )

$629

1.6%

Campbell Soup (NYSE: CPB  )

$390

2.6%

Yahoo! (Nasdaq: YHOO  )

$185

5.4%

And the scary part is that these small investors trade frequently, paying these commissions over and over again. Given that the market's historical average return is only 10% or so, you can't afford to trade much even with small commissions -- at least not until you have more capital to invest.

It's easy to nickel and dime yourself to death without even realizing it.

For more on retirement investing:

Looking for good advice on investing in your IRA? The Motley Fool's Rule Your Retirement newsletter can help, with stock and fund recommendations in every issue. Try it out free for 30 days and see how Rule Your Retirement can get you on the path to a successful retirement. 

Fool contributor James Brumley doesn't own shares of the companies mentioned in this article. Wal-Mart is a Motley Fool Inside Value pick. Google is a Motley Fool Rule Breakers recommendation. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.


Read/Post Comments (1) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 12, 2008, at 3:35 PM, RLStkMarketGame wrote:

    The point of your article is a good one - even small commissions add up fast, but your math is way off. Paying a $10 commission on each of 5 trades for your example 5 stock portfolio is not well over 10% of your money. It is $50(cost of commissions)/$5817(cost of shares) = 0.86% This is not too bad. It's the frequent trading that kills the cash.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 726468, ~/Articles/ArticleHandler.aspx, 10/31/2014 11:06:58 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 17,364.99 169.57 0.99%
S&P 500 2,014.74 20.09 1.01%
NASD 4,625.23 59.09 1.29%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/31/2014 10:50 AM
CPB $44.32 Up +0.41 +0.93%
Campbell Soup CAPS Rating: ***
GE $25.84 Up +0.17 +0.66%
General Electric C… CAPS Rating: ****
GOOGL $565.82 Up +5.55 +0.99%
Google (A shares) CAPS Rating: ****
WMT $76.92 Up +0.47 +0.61%
Wal-Mart Stores CAPS Rating: ***
YHOO $45.72 Up +0.09 +0.19%
Yahoo CAPS Rating: ***

Advertisement